The Fed has signalled 3 interest rate cuts for next year, per BI.
Officials have revised their expectations, anticipating a slightly faster cooling of inflation next year, according to the latest economic projections released Wednesday. Some economists argue that the final phase of the Fed's historic fight against inflation will be challenging, and while Fed Chair Jerome Powell and others acknowledge the possibility of additional rate hikes, Wall Street appears skeptical. Futures indicate the potential for the first rate cut in March, with slightly better odds for a May rate cut.
The latest Fed estimates also indicate an increased expectation of more rate cuts next year, offering potential relief for the sluggish housing market grappling with high mortgage rates and weakened demand. The Fed might consider rate cuts due to an economic downturn leading to increased unemployment or if inflation surpasses the 2% target, and higher interest rates prove unnecessary. Another scenario for rate cuts could be if inflation falls below 2%, similar to the period preceding the Covid-19 pandemic.
There's optimism that the central bank is working toward achieving a rare soft landing, where inflation returns to the Fed's target without a sharp rise in unemployment. However, this outcome is uncertain, even with the job market slowing gradually while remaining solid. Economic growth has cooled from its rapid pace in the third quarter, but it stays positive. Black Friday and Cyber Monday saw record-setting sales.
Despite the resilience of the economy in the face of elevated interest rates, uncertainties persist. The year 2024 will test the economy's resilience as Americans draw down pandemic savings, credit card balances grow, and retail sales are expected to report a decline in November for the second consecutive month. While some anticipate a soft landing, others remain cautious, predicting below-trend growth, rising unemployment, and slowing wage growth in the coming year. Vanguard, in an analyst note, emphasized the challenges ahead in achieving sustained 2% inflation.
